Grain Processing Corp. v. AMERICAN MAIZE-PRODUCTS

• Decision Date: 20 July 1995
• Docket Number: No. H81-237.,H81-237.
• Citation: 893 F. Supp. 1386
• Parties: GRAIN PROCESSING CORPORATION, Plaintiff, v. AMERICAN MAIZE-PRODUCTS COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Indiana

893 F. Supp. 1386

GRAIN PROCESSING CORPORATION, Plaintiff, v. AMERICAN MAIZE-PRODUCTS COMPANY, Defendant.

No. H81-237.

United States District Court, N.D. Indiana, Hammond Division.

Decided July 20, 1995.

Addendum to Opinion July 31, 1995.

COPYRIGHT MATERIAL OMITTED

Geoffrey G. Gilbert, McBride Baker & Coles, Chicago, IL, for plaintiff.

Robert L. Baechtold, Fitzpatrick, Cella, Harper & Scinto, New York City, for defendant.

OPINION

EASTERBROOK, Circuit Judge.^*

Grain Processing Corporation (GPC) owns U.S. Patent No. 3,849,194 (the '194 patent). Claim 12 of this patent covers:

A waxy starch hydrolysate having

a dextrose equivalent value between about 5 and about 25,

a descriptive ratio greater than about 2, said descriptive ratio being the quotient obtained by dividing the sum of the percentage of saccharides, dry basis, having a degree of polymerization of 1 to 6, by the dextrose equivalent value,

a monosaccharide content in the range of from about 0.1 percent by weight, to about 2.4 percent by weight, dry basis,

a disaccharide content in the range of from about 1.3 percent to about 9.7 percent, by weight, dry basis, and

being further characterized as capable of producing an aqueous solution of exceptional clarity and substantially complete lack of opaqueness when said hydrolysate is added to water.

When this patent was sought in 1966, CPC International Inc. made the only products meeting this description. They did not sell well. Today products of this general kind, known as low-dextrose malto-dextrins, are important ingredients in a wide variety of foods. The '194 patent issued on November 19, 1974. By the time it expired in 1991, food manufacturers were buying more than 200 million pounds of malto-dextrins annually. The product serves as a binder that also is useful for adjusting the viscosity and freezing point of foods. Malto-dextrins can be employed as bulking agents for other ingredients, such as aspartame, that lack sufficient volume to permit accurate dispensing. Lowdextrose malto-dextrins are tasteless and clear in solution, ideal properties for many purposes. Malto-dextrins today can be found in cake mixes, gravy mixes, candy, glazed nuts, instant coffees, soup, and a hundred other foods. Apparently the product has other handy properties: the oil industry has used it as an aid in drilling wells!

GPC, which acquired the patent and associated business from CPC on October 10, 1979, discontinued the manufacture of Mor-Rex 1918 and Mor-Rex 1920, the two malto-dextrins CPC made under the patent. (Mor-Rex 1918 had been sold to the food industry and Mor-Rex 1920 to the oil industry; the product was identical but the bags differed.) GPC continued selling its own Maltrin line of malto-dextrins, which are outside the '194 patent because made from non-waxy starch. In 1979 a third firm made low-dextrose malto-dextrins: American Maize-Products Company (AMP). AMP employed waxy starch; GPC began with non-waxy starch. On May 12, 1981, GPC filed this patent-infringement action against AMP. After a trial this court, and later the court of appeals, concluded that some of AMP's output infringed claim 12 of the '194 patent. 840 F.2d 902 (Fed.Cir.1988). AMP promptly changed its method of producing malto-dextrins, believing that the new process yielded a product with a descriptive ratio (D.R.) under 1.9, the numerical equivalent this court adopted for the language "about 2" in the '194 patent. Tests conducted by AMP using the Lane-Eynon procedure showed that the new process avoided infringement. Further proceedings led the court of appeals to hold that the dextrose equivalent (D.E.) value, the denominator in computing the D.R., was to be determined by the Schoorl procedure, which the inventors themselves had used. 21 U.S.P.Q.2d 1474, 1991 WL 59343 (Fed.Cir.1991). The Schoorl procedure gives a lower D.E. value, and therefore a higher D.R., than does the Lane-Eynon procedure. Tested using the Schoorl procedure, 82.5% of AMP's post-1988 production of Lo-Dex 10, a malto-dextrin with a D.E. in the range of 9 to 12, had a D.R. exceeding 1.9. FAMP concedes that Lo-Dex 10 meets the other elements of claim 12, so infringement has been established and only damages remain to be determined. The case was reassigned to me after the retirement of Judge Parsons, who conducted the liability trial and associated proceedings. A damages trial was held on July 10, 11, and 12; this opinion records my findings of fact and conclusions of law.

I

"Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." 35 U.S.C. § 284. An aggrieved patent holder thus receives the greater of lost profits or a reasonable royalty. GPC submits that it lost profits of almost $35 million, which with prejudgment interest implies an award exceeding $68 million. Alternatively GPC seeks a reasonable-royalty award representing 28% of AMP's Lo-Dex 10 revenues. For its part, AMP submits that GPC is not entitled to any lost-profits award (if only because Maltrin 100, the product competing with Lo-Dex 10, was not covered by the '194 patent) and that a reasonable royalty would be 1% to 3% of sales of infringing Lo-Dex 10. I start with the reasonable-royalty question, because the right way to determine a reasonable royalty has a profound effect on GPC's claim for lost profits.

Lewis M. Koppel, GPC's expert on the royalty question, proceeded roughly as follows. First determine how much GPC or its predecessor CPC would have lost by granting a license, which sets the patent holder's minimum demand. Koppel thought that this was 7.7% of AMP's anticipated sales. (Anticipated is a key word; Koppel assumed that the parties conducted their negotiations in 1974, when AMP was just entering the business, and never returned to the subject during the patent's 17-year life.) Then determine how much AMP made by manufacturing Lo-Dex 10, which sets AMP's maximum offer. Koppel concluded that AMP would have offered as much as 43% of net sales. Where the parties would strike a bargain in a hypothetical negotiation would depend on the factors identified in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970), modified, 446 F.2d 295 (2d Cir.1971). See also SmithKline Diagnostics, Inc. v. Helena Laboratories Corp., 926 F.2d 1161, 1168 (Fed.Cir.1991). After canvassing these factors, Koppel opined that 28% of net sales was the most likely royalty.

Raymond S. Sims, approaching the same subject on behalf of AMP, took a strikingly different approach. Sims observed that CPC and GPC offered to license their portfolios of malto-dextrin patents but found few takers; several potential users rejected a 5% royalty out of hand as too high. E.g., DX 38. Other improvement patents in the business were licensed at rates of 1% to 3%. These actual negotiations informed the hypothetical-negotiation approach to the reasonable-royalty question. Why did royalties not exceed 3%? Sims thought the bulk food products business a low-margin affair, unable to spend lavishly — but willing to invest in designing around patents. When negotiating for a license to use the '194 patent, AMP would not have been willing to offer its total profits as the maximum royalty, Sims observed, because AMP had other options — principally to invest in a production process that could produce a 10 D.E. malto-dextrin with a D.R. less than 1.9.

AMP has used four methods to produce Lo-Dex 10 (initially called Fro-Dex 10; I use the Lo-Dex name throughout for simplicity). Process I was in place between 1974 and 1982. In mid-1982 AMP switched to Process II, which it employed until the appellate opinion of 1988 found that some product made by Process II infringed the '194 patent. Then AMP switched to Process III, with the results — disastrous in retrospect — that I have described. Once the Federal Circuit concluded that the Schoorl process must be used to measure the D.E. for purposes of the '194 patent, AMP switched to Process IV. GPC has stipulated that Lo-Dex 10 made by Process IV does not infringe the '194 patent. When the patent expired in November 1991, AMP switched back to Process III. This history supplied the kernel of Sims's approach. Although Sims believed that Process I was a candidate for noninfringing production (a position I consider and reject in Part III.2 of this opinion), his principal benchmark was the cost AMP incurred to adopt Process IV. If it could make a non-infringing Lo-Dex 10 by Process IV, AMP would never pay a royalty greater than the cost difference between Process III and Process IV. Sims concluded that the cost difference was approximately 2.3%. Koppel conceded on the stand that if AMP had this manufacturing option in 1974, then the cost difference would set a cap on the royalty. Tr. 263. Koppel qualified this answer by observing that the cost difference would set a cap only if the two processes produced products that buyers viewed as equivalent. For example, if the non-infringing Lo-Dex 10 had an off-taste, and customers therefore would not pay as much for it, AMP's maximum royalty offer would be the sum of the production cost increase and the selling price decrease. But I find that the Lo-Dex 10 produced by Process IV was indistinguishable from customers' standpoint. Randolph Holme, who is responsible for Lo-Dex production, did not receive a single complaint or inquiry during the time Process IV was in use. Tr. 395. The Lo-Dex 10 made by Process IV had a lower D.R. (that was, after all, the objective of the switch), but no one argues that any customer cared a whit about the product's descriptive ratio.

But was Process IV available to AMP for the entire life of the patent? Science progresses, and AMP's ability to make a non-infringing 10 D.E. malto-dextrin in 1991 does...